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produciton function
produciton function
The production function tells us how an additional unit of labour impacts the production of a product. The law of diminishing returns tells us that as more labour/variable inputs are added, the marginal product will progressively decrease until an additional unit of labour actually decreases the total product.
Marginal product(Mp)= Change in output divided by change in input
Average product(Ap)= Total output divided by variable inputs
Short run vs Long run
Short run
Short run
The short run is the future period in which at least one input is unable to change. For firms, less change can be done in this period and the supply and demand are often in disequilibrium
Long run
Long run
The long run is the future period in which all inputs are variable and can be adjusted. Supply and demand in the long run are usually in equilibrium.
Production costs in the short run
Production costs in the short run
Total fixed cost(Tfc): Costs that do not change no matter how much product is produced. Ex. rent, capital.
Total variable cost(Tvc): Costs that change as output changes. Ex. labour.
Total cost(Tc): Tfc+Tvc
Average fixed cost(Afc): Tfc/Q
Average variable cost(Avc): Tvc/Q
Average total cost(Atc): Tc/Q
Marginal cost(Mc): The change in the cost for one more unit produced. Calculated by change in Tc/change in Q
-The Mc goes down then goes up because it first becomes cheaper to produce a product and then diminishing returns will make it harder to produce more.
-The Mc intersects the Atc and Avc at their lowest points
-The average fixed cost will continue to lower as it is spread among more and more units as the quantity of product increases.
Taxes effect on cost curves
Taxes effect on cost curves
Per unit taxes are taxes on each individual unit produced. Therefore, it increases as production increases making it a variable cost. This means that the Afc does not change but the AVC, Mc and Atc all change because they all have something to do with the variable cost.
A lump-sum tax is a tax that is the same no matter how much of a product is produced. Thus, it only affects the Afc and Atc.
Economices of scale
Economices of scale
If all inputs double and output more than doubles, this firm is experiencing economies of scale/ increasing returns to scale. This is depicted as a downward curve with fewer costs and increased output.
Constant returns to scale
Constant returns to scale
If inputs double and outputs also double, this firm is experiencing constant returns to scale. this is depicted as a flat plateau.
Diseconomies of scale
Diseconomies of scale
If inputs double and output less than doubles, this firm is experiencing decreasing returns to scale. This is depicted as an upward rising in the cost curve.
Types of profit
Accounting profit
Accounting profit
Accounting profit, used by accountants, can be calculated by subtracting the explicit costs from the revenue. Explicit costs are the inputs for making the product.
Economic profit
Economic profit
Economic profit, used by economists, is calculated by subtracting the explicit costs and implicit costs from the revenue. Implicit costs are profits that could have been generated by doing something else at the same time. Thus, a good economic profit would be zero which is also known as normal profit. Though this may seem bad, it actually means that all resources are being used to their fullest potential.
Vocabulary/Summary:
Production function: The correlation between inputs and outputs
Short run: The timeframe in which at least one input is unable to change
Long run: The timeframe in which all inputs are variable
Economies of scale: Fewer costs and increased production
Explicit costs: Costs for inputs
Implicit costs: Opportunity cost lost
Accounting profit: Revenue-explicit costs
Economic profit: Revenue-explicit costs-implicit cost
Normal profit: Zero economic profit
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